Suppy Chain MGT Intro

Introduction to Supply
Chain Management
Dr.
Dr.Dale
DaleS.
S.Rogers
Rogers
Center
Centerfor
forLogistics
LogisticsManagement
Management
University
UniversityofofNevada
Nevada
MGRS
MGRS474/674
474/674
Seminar Goal
■ Establish an understanding of the role and function of
supply chain management strategies in the context of
the technology marketplace.
■ Develop a more thorough understanding of the
critical interrelationships that compose the supply
chain.
■ Concept of supply chain system design
■ Introduce and ask participants to identify an
opportunity to establish or improve supply chains.
Future of Competition
Supplier Inbound Manufacturing Distribution Outbound Ultimate

Transport Transport Customer
My Supply Chain vs. Your Supply

Chain

1986 CLM DEFINITION OF LOGISTICS
…is the process of planning, implementing

and controlling the efficient, cost effective
flow and storage of raw materials, in-process
inventory, finished goods, and related
information from point-of-origin to point-of-
consumption for the purpose of conforming to
customer requirements.
[Council of Logistics Management, 1986]

SUPPLY CHAIN MANAGEMENT
…is the integration of key business processes

from end user through original suppliers, that
provides products, services, and information
that add value for customers and
other stakeholders.
[The International Center for Competitive Excellence, 1994]

[Global Supply Chain Forum, 1998]
1998 CLM DEFINITION OF LOGISTICS
….is that part of the supply chain process that

plans, implements, and controls the efficient,
effective flow and storage of goods, services,
and related information from the point-of-
origin to the point-of-consumption in order to
meet customers' requirements.
[Council of Logistics Management, 1998]

Integrating and Managing Processes Across the Supply Chain
Information Flow
Manufacturer
Tier 2 Tier 1
Consumer
Supplier Supplier Logistics Customer
/End-user
Purchasing Marketing & Sales
PRODUCT FLOW
Production Finance
R&D
Supply Chain Business Processes
CUSTOMER RELATIONSHIP MANAGEMENT
CUSTOMER SERVICE MANAGEMENT
DEMAND MANAGEMENT
ORDER FULFILLMENT
MANUFACTURING FLOW MANAGEMENT
PROCUREMENT
PRODUCT DEVELOPMENT AND COMMERCIALIZATION

RETURNS
Source: Douglas M. Lambert, Martha C. Cooper, Janus D. Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities,” The
International Journal of Logistics Management, Vol. 9, No. 2, 1998, pp. 2.
Required Behaviors
Customer relationships are managed by customer focus teams which
negotiate mutually beneficial product / service agreements with large,
strategically significant customers.
Customer Relationship
Management Process
Customer Relationship ! Customer focus teams develop and implement
Management
customer partnering programs.
! Product/service agreements are established.
! New customer interfaces are used to better predict
customer demand and improve the way customers
are serviced.
! Teams identify and eliminate sources of production
variability.
! Key performance evaluation criteria (both company
performance and customer account profitability) are
used to measure results.
Required Behaviors
Maximizing customer service means providing a focused point of contact
for all customer enquiries in order to insulate them from the complexity of a
large, multi-divisional corporation.
Customer Service
Management Process
! Customer Service provides a single source of
Customer Service
Management customer information, a point of contact for
administration of the product / service agreement.
! Instant promising/availability information is
conveyed via the supply/demand manager
interface.
! On-line/real-time product and pricing information
assists customers with order placement.
! On-line/real-time access to order status
information is available to support customer
enquiries.
Required Behaviors
In demand management, customer demand is continuously gathered,
Demand Management
compiled and renewed in order to match our supply capability with
requirements in the market.
Process
! Demand requirements and supply capabilities are
Demand continuously modeled using point of sale and “key”
Management
customer data.
! Market requirements and production plans are
coordinated on an enterprise-wide basis.
! Multiple sourcing and routing options are
considered at the time of order receipt.
! Worldwide on-line/real-time inventory availability
check and promising capacity is employed.
! Demand and production rates are synchronised and
inventories are managed globally.
Required Behaviors
Customer orders that are 100% on-time, accurate, and complete require an
integrated supply and delivery system that is responsive, flexible and
customer-driven.
Fulfilment Process
! Customer need dates and requirements drive
Fulfillment the process.
! Manufacturing, distribution, and transportation

plans are integrated.
! Strategic alliances with channel partners and

carriers are formed to meet requirements and to
reduce total-delivered-cost of the product to
customers.
Required Behaviors
Rapid response to changing market conditions implies maximum flexibility
in production planning and manufacturing capabilities.
Manufacturing Flow
Management Process
! Production must shift from a supply/push method
Manufacturin of operation to a demand/pull method based on
g Flow customer needs.
Management
! Manufacturing processes must flexibly respond to
market changes with rapid changeover capabilities
for mass customisation.
! Minimum lot sizes are planned to move toward a
make to order environment.
! Production priorities are driven by required delivery
dates.
! Specific supply strategies are developed for each
customer segment.
Required Behaviors
Relationships with major suppliers are corporately managed in strategic

alliances while purchase order transactions become simplified and
integrated with the supply process.
Procurement Process
! Strategic plans of suppliers and company are
Procurement aligned to focus resources on holding down costs
and developing new products.
! Supplier categorisation and management is

implemented on a corporate global basis, with
purchasing in a strategic contracting role.
! Purchase order transactions are integrated with

the supply process to improve productivity and all
areas of supplier performance.
SUPPLY CHAIN NETWORK STRUCTURE
Tier 3 to Tier 3 to
Initial Tier 2 Tier 1 Tier 1 Tier 2 Consumers/
suppliers Suppliers Suppliers Customers Customers End-Customers
1 1
Tier 3 to n suppliers
2 2
Consumers/End-customers
n n
1 1
1
Initial Suppliers
Tier 3 to n customers
n 1
2 2
n
1
2 3 n
1
3
2
n n
n
Focal Company Members of the Focal Company’s Supply Chain

SUPPLY CHAIN MANAGEMENT FRAMEWORK:
Elements and Key Decisions
2) What processes should be

linked with each of these
key supply chain members?
Supply Chain
Business
Processes
Supply Chain Supply Chain

Management Network
Components Structure
3) What level of integration and 1) Who are the key supply

management should be applied chain members with whom
for each process link? to link processes?
Source: Douglas M. Lambert, Martha C. Cooper, and Janus D. Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities,” The
International Journal of Logistics Management, Vol. 9, No. 2, 1998.
TYPES OF INTER-COMPANY BUSINESS PROCESS LINKS
Tier 3 to Tier 3 to
Initial Tier 2 Tier 1 Tier 1 Tier 2 Consumers/
suppliers Suppliers Suppliers Customers Customers End-Customers
1 1
Tier 3 to n suppliers
2 2
n n
1 1
1
Initial Suppliers
n 2 2
n
1
2 3 1 n
1
3 n 2
n n
n
1 1
n n
Managed Process Links Focal Company

Monitor Process Links Members of the Focal Company’s Supply Chain
Not-Managed Process Links
Non-Member Process Links Non-Members of the Focal Company’s Supply Chain
THE FOCAL COMPANY’S ALTERNATIVES FOR
INVOLVEMENT WITH LINK 2
Focal
Company Company B Company C
Alternative 1) Integrate with and actively

manage Link 2.
Alternative 2) Monitor the procedures of

Company B and Company C for integrating
and managing Link 2.
Alternative 3) Not involved, leave the

Link 1 Link 2 integration and management up to
Company B and Company C.
 The Global Supply Chain Forum, The Ohio State University -- Do not reproduce, cite or quote without written permission.
SUPPLY CHAIN MANAGEMENT: THE DISCONNECTS
Information Flow
Manufacturer
Tier 2 Tier 1 Consumer/
Supplier Supplier Customer End-Customer
Logistics
Purchasing Marketing & Sales
PRODUCT FLOW
Production Finance
R&D
CUSTOMER RELATIONSHIP MANAGEMENT
CUSTOMER SERVICE MANAGEMENT
DEMAND MANAGEMENT
ORDER FULFILLMENT
MANUFACTURING FLOW MANAGEMENT
PROCUREMENT
PRODUCT DEVELOPMENT AND COMMERCIALIZATION
RETURNS
REPRESENTATIVE BUSINESS PROCESSES
IDENTIFIED IN SELECTED CASE COMPANIES
Company A Company B Company C
• Product Development • Strategy Development • Selling Process
• Supply Chain • Business Management • Customer Order Fulfillment
• Customer Management • Market Development • Manufacturing & Supply
• Product Development • New Product Creation
• Manufacturing Capability Development • Procurement
• Order Fulfillment
Company D
• Business Process Company E Company F
- Marketing Planning • Customer Relationship Management • Supply Chain
- Prospecting • Customer Order Fulfillment • Account Planning
- Exploring Needs • Business Planning
- Developing Solutions • Manufacturing & Supply
- Decision • Product Development
- Presenting & Closing • Procurement
- Delivering
- Demonstration Results
Fundamental Management Components
Physical & Technical Managerial & Behavioral

Management Components Management Components
Planning and Management

Control Methods Methods
Work Flow/ Power and

Activity Structure Leadership Structure
Organization Risk and

Structure Reward Structure
Communication Culture and

and Information Flow Attitude
Facility Structure
Product Flow
Facility Structure
AN ILLUSTRATION OF A SUPPLY CHAIN SHOWING EACH
INTEGRATED AND MANAGED BUSINESS PROCESS LINK
Demand Management Process Order Fulfillment Process
Product Development and Customer Relationship Management Process

Commercialization Process
Managed Demand Management Process Links

Managed Order Fulfillment Process Links Focal Company.
Managed Product Develop./Commercial Process Links
Managed Customer Relationship Manag. Process Links Selected Members of the
Not-Managed Business Process Link. Focal Company's Supply Chain.
AN ILLUSTRATION OF A SUPPLY CHAIN COMBINING ALL THE
INTEGRATED AND MANAGED BUSINESS PROCESS LINKS
Managed Demand Management Process Links Focal Company.

Managed Order Fulfillment Process Links
Selected Other Members
Managed Product Develop./Commercial. Process Links of the Focal Company's
Managed Customer Relationship Manag. Process Links Supply Chain.
Not-Managed Business Process Links.

IMPLEMENTATION OF SUPPLY CHAIN MANAGEMENT
Typical
Functions
Silos
Business
Processes Sales & Manufac- Finance &
Technical Logistics Purchasing
Marketing turing Accounting
S Customer
Relationship
Management
Account
Management
Requirements Requirements
Definition Definition
Manufacturing
Strategy
Sourcing
Strategy
Customer
Profitability
C
U Customer Service Account Technical Performance Coordinated Priority Cost U
Management Administration Service Specifications Execution Assessment To Serve
P Demand Demand Process Network Capability Tradeoff
S
Management Sourcing
P Planning Requirements Planning Planning Analysis
T
Special Environmental Distribution Plant Selected Distribution
L Fulfillment
Orders Requirements Management Direct Supplier(s) Cost O
I Manufacturing Flow Packaging
Management Specifications
Process
Stability
Prioritization
Criteria
Production
Planning
Integrated
Supply
Manufacturing
Cost
M
E Procurement
Order Material Inbound Integrated Supplier Materials E
Booking Specifications Flow Planning Management Cost
R Product Business Product Movement Process Material

R
Development and R & D Cost
S Commercialization Plan Design Requirements Specifications Specifications
S
Information Architecture, Data Base Strategy, Information Visibility
Note: Process sponsorship and ownership must be established to drive the attainment of the supply chain vision and eliminate
the functional barriers that artificially separate the process flows.
CHARACTERISTICS OF
SUPPLY
CHAIN MANAGEMENT
! Strategy and policies shared across
supply
chain
! Fully coordinated supply chain “cash to

cash”
! Integrated business processes for entire

supply chain
! Measures shared across supply chain

THE MOVE TOWARDS
TRADE MARKETING
From:
Traditional Buyer/Supplier Relationship
MIS MIS
R&D R&D
MKT Buyer Seller MKT
LOG LOG
ACCT ACCT
To:
Building Stronger Partnerships Through Multiple Linkages
Customer Supplier
MIS MIS
R&D R&D
MKT MKT
LOG LOG
ACCT ACCT
INVENTORY POSITIONS AND MAJOR
FLOWS IN A SUPPLY CHAIN
Orders Orders Orders
Payments Payments Payments

Suppliers Information Manufacturer Information Wholesalers Information Retailers
Product Product Product
Variable cost Variable cost Variable cost Variable cost

of product $5 of material $10 of product $60 of product $80
Full manufac- Acquisition Other acquisition Other acquisition

tured cost $7 cost $1 costs $2 costs $2
Selling Other variable Selling Selling

price $10 costs $14 price $80 price $150
Total variable
cost of product
$25
Full manufac-
tured cost $40
Selling
price $60
FUTURE RESEARCH OPPORTUNITIES:
PROCESSES
❐ What are the operational definitions of the key business
processes and what are the relationships among the processes?
❐ What are the relationships among the processes and the
functional silos? What is the tolerance for sub-optimization?
❐ How do you obtain buy-in from the functional areas in order to
implement a process approach within the firm?
❐ How can the various participants in a company be encouraged to
work toward a common goal? Marketing and manufacturing
reward structures often tend to be counter to one another yet the
firm has overall profitability goals.
❐ Does the answer lie in similar reward structures, rewards tied to
overall performance, or will process teams accomplish much of
this?
❐ Beyond internal integration, how does inter-organizational change
management be implemented?
SUPPLY CHAIN MAPPING
❏ How should the existing supply chain be mapped?

❏ Should the map include all connected firms or only the value-
adding firms?
❏ Are there other means of determining who should and should not
be part of the supply chain map? For example, should only the
most critical members be mapped?
❏ What are the implications for good SCM practice based upon the
shape of the supply chain, that is horizontal structure, vertical
structure and focal company position in the supply chain?
VALUE
❏ What is the value proposition at the consumer level or end

point of the supply chain?
❏ What are the methods that should be used to determine
value?
❏ How should the various firms in the supply chain share the
costs and the benefits?
METRICS
❏ What metrics should be used to evaluate the performance of the
entire supply chain, individual members or subsets of members?
❏ What are the potential barriers to implementation and how should
they be overcome?
❏ What characteristics of managing the supply chain are related to
higher performance of the supply chain, subsets of firms in the
supply chain, and the individual firms? Since the processes may
vary by link, these measures may need to be both process
specific and global.
NETWORK REDESIGN
❏ What is the process to take the map of the existing supply chain
and modify it to obtain the best supply chain given the desired
outputs?
❏ How frequently should the supply chain structure be reviewed?
What approaches could be used to perform the evaluation?
❏ Which approaches are appropriate for different supply chain
forms and situations?
❏ How should the firm analyze the network to determine if there is a
better configuration?
❏ How does building a stronger relationship with one member affect
the management time allocable to other members?
❏ Should a third party manage some relationships to free resources
for this closer relationship, which thus, changes the membership
of the network? Is it an iterative process?
INTEGRATION
❏ What determines with whom to link business processes?
❏ What are the steps to take to determine with whom to link?
❏ What are the critical factors to the firm's success and that enable
the firm to link with specific companies?
❏ What are the barriers to forming these relationships? Should the
decision process vary based on whether Tier 1 or Tier n
companies are the focus?
❏ For Tier n companies, what critical factors imply a closer
relationship of managed or monitored links to key members to
assure supply, quality, and service?
❏ What are the compelling reasons to have closer ties with
companies beyond the first tier?
PROCESS INTEGRATION
❏ What determines the processes to link with these key members?

❏ How should the firm decide which internal process to link with
which suppliers and customers?
❏ What decision criteria determine whose internal business
processes prevail across all or part of the supply chain?
IMPLEMENTATION OF MANAGEMENT COMPONENTS
❏ What determines the type/level of integration that should be

applied to each process link? It is important to provide firms with
some guidelines regarding what level of management
components to apply to achieve the desired relationship and
management of a link. More components and/or a higher level of
effort on a component may be required to achieve a desired level
of integration of a process link.
❏ What constitutes a low level versus a high level of a specific
management component?
❏ What is the relationship among the management components for
successful SCM?
❏ Do changes in the physical and technical components
automatically require changes in the managerial and behavioral
components?
MANAGING THE SUPPLY CHAIN INVOLVES THREE
CLOSELY INTER-RELATED ELEMENTS:
❏ The supply chain network structure

❏ The supply chain business processes
❏ The management components
SUCCESSFUL SCM IS BASED ON DETERMINING:
❏ Who are the key supply chain

members with whom to integrate
processes?
❏ What are the supply chain processes
to link with these key members?
❏ What type/level of integration should
be applied to each of these process
links?
LOGISTICS MANAGEMENT DEFINED
…the process of planning, implementing and controlling

the efficient, cost effective flow and storage of raw
materials, in-process inventory, finished goods, and
related information from point-of-origin to point-of-
consumption for the purpose of conforming to customer
requirements.
Council of Logistics Management (1986)
…is the integration of key business processes

from end user through original suppliers, that provides
products, services, and information
that add value for customers
and other stakeholders.
[The International Center for Competitive Excellence, 1994]

[Global Supply Chain Forum, 1998]
TYPES OF INTER-COMPANY BUSINESS
PROCESS LINKS
Ti er 3 to Ti er 3 to
Initia l Ti er 2 Ti er 1 Ti er 1 Ti er 2 Consumer s/
supplie rs Suppl ier s Suppl ier s Custo mer s Custo mer s End -Custome rs
1 1
Tier 3 to n su ppliers
2 2
n n
1 1
1
Initial Suppliers
n 1
2 2
1 n
2 3 1 n
1
3 n 2
n n
n
1 1
n n
Focal Company
Managed Proces s Links
Monitor Process Links Members of the Focal Company’s Supply Chain
Not-Managed Process Links
Non-Member Process Links Non-Members of the Focal Comp any’s Supply Chain
Source: Douglas M. Lambert, Mart ha C. Cooper, and Janus D. Pagh, “Supply Chain Management : Implement at ion Is sues and Res earc h Opport unities,” The
Internat ional Journal of Logisti cs Management, Vol. 9, No. 2, 1998, p. 7.
COMPONENTS OF 1997 LOGISTICS COSTS
Total U.S. Logistics Costs ($862 Billion)
Forwarders
Air Freight Oil Pipelines
Water Freight Freight
2.7% 1%
3.0% 1%
Inventory
Carrying Costs
Railroads Freight 29.7%
4%
Warehousing
Motor Carriers Costs
Freight 8%
Order
46.4% Administration
Other Costs Costs
0.6% 4%
SOURCE: Adapted from Robert V. Delaney, “Ninth Annual State of Logistics Report,” press conference remarks to the National Press Club,
Washington, D.C. (June, 1998)
COST TRADEOFFS REQUIRED IN
MARKETING AND LOGISTICS
Marketing
Product
Price Promotion
Place
Customer Service
Levels
Inventory Transportation
Logistics
Carrying Costs Costs
Lot Quantity Warehousing

Costs Costs
Order Processing
and information
Costs
Marketing Objective: Allocate resources to the marketing mix in such a manner as to maximize the long-term profitability of the firm.
Logistics Objective: Minimize Total Costs given the customer service objective where total costs = Transportation Costs +
Warehousing Costs + Order Processing and Information Costs + Lot Quantity Costs +
Inventory Carrying Costs
Structure Versus Behavior
■ Structure
determines behavior
■ Behavior does not
determine structure
Sub-Optimization
■ Local optimizations result from

organizations optimizing own results
rather than the total supply chain.
■ Systems approach is critical.
■ Performance measurements and
reward systems must be synchronized
with supply chain objectives.
Supply Chain Management
Defined
Supply chain management is the
integration of business processes from
end user through original suppliers that
provides products, services, and
information that add value to customers.
Source: Harrison, Alan, “Co-Makership as an Extension of Quality Care,”International Journal

of Quality & Reliability Management, Vol. 7, No. 2 (1990), pp. 15-22.
UCS Operations & Program Support Vision
Partnering with our clients around

the globe, serving their needs for
future success...
...Racing as a team for market

differentiation in supply chain
management.
Three Critical Business
Elements
“The three most important things you
need to measure in a business are:
1. Customer Satisfaction
2. Employee Satisfaction
3. Cash Flow
Source: Jack Welch, CEO, General Electric
Computing History
■ 1833 Charles Babbage developed a calculating machine with input, storage

and output
■ 1848 George Boole's work on mathematics (Boolean algebra) is the basis
for all binary operations
■ 1878 W. T. Odhner used pin-wheels for the next generation of mechanical
calculating machines
■ 1886 Herman Hollerith (founder of IBM®) had the idea of using punched
cards to keep and transport information
■ 1886 Dorr E. Felt built the first successful key-driven (as opposed to dial)
calculator
■ 1891 William S. Burroghs invented the first robust calculating machine and
started the office calculation industry
Burroughs Calculating Machines
■ Over 5,000 parts, with as
many as 2000 moving in
together at any one time.
■ Most technologically
advanced of it's time
■ Price comparable to that
of a new car.
■ Options such as non-add,
non-print, and individual
Class 3 - 1911-1929 clearing keys for each
column.
■ Small, portable - 25
lbs.
■ Square keys added
“wings to the
1920s
fingers”
■ Faster keying
1949
Elements in the Framework of
Business
Processes
Supply Chain
Management
Management Supply Chain

Components Structure
Supply Chain Strategy
Product
Strategy
Manufacturing Logistics Demand

Transformation Strategy Management
Strategy Strategy
Marketing
Strategy
Supply Chain Strategy
EDI EDI JIT
Replenishment Signals BTO
Signals Orders
Supplier Customer
Plants Supplier Order
Owned Compaq Fulfillment
Whses Plants
THE CUSTOMER PULLS PRODUCT THROUGH THE SUPPLY CHAIN

Logistics Strategy
Customer
Understanding
Performance Emerging
Measurement Markets
Formalization
Intense Information
Relationships Technology
Flexibility/
Agility
Selecting Supply Chains
Customer Customer Customer Customer
Company
Supplier Supplier Supplier
•A firm’s supply chain is much more like an uprooted tree than a chain.
•Not all supply chains are appropriate for ECR.
Elements of Supply Chain
Management
Procurement
Demand Order
Management Fulfillment
Product
Customer Development
Service and
Management Commercialization
Customer Manufacturing
Relationship Flow
Management Management
Customer Relationship
Management
■ Identifying key customer targets
■ Developing and implementing programs
with key customers
Customer Service
■ Single point of contact - one face to the

customer
■ Current information about the order
■ Production and distribution status
■ Product information
Demand Management
■ Synchronize flow of products and

materials to customer demand
■ Forecasting
■ Reduction of variability
Order Fulfillment
■ Timely and accurate delivery

■ Objective to exceed customer
expectations
■ May happen in many places throughout
supply chain
Manufacturing Flow
Management
■ Making products that customer wants
■ Flexible manufacturing
Procurement
■ Managing relationships with strategic

suppliers
■ Not just “bid &buy”
■ Should not be “order placers”
■ Support manufacturing flow
management and new product
development
Product Development and
Commercialization
■ Integrate customers and suppliers in
development process
■ Reduce time to market
■ Incorporate supply chain management
considerations into product design
Burroughs Computers
“Burroughs built splendid machines attracted a
loyalty that surpassed even IBM’s….”
“What made the Burroughs computers so good was
the then-unique idea that the software people,
the programmers, needed to participate in
designing the computers from the beginning.”
In most firms, engineers came first, programmers
second. Burroughs went much further than the
other firms in bringing programmers in quickly.”
Source: Joel Shurkin, (1996). Engines of the Mind, pp. 273-274.
Components
Planning Risk
Management Product &
&
Methods Structure Reward
Control
Structure
Organization Culture
Work
Structure &
Structure
Attitude
Power
Product Information
&
Flow Flow
Leadership
Facility Facility
Structure Structure
Structure
Planning & Control
■ Key to moving organization or supply

chain in right direction.
■ Joint planning
■ Planning important during all
evolutionary phases
■ Control is best performing metrics.
AVERAGE INVENTORY INVESTMENT UNDER
CONDITIONS OF UNCERTAINTY
A. With variable demand
Inve ntory
200 Average
cycle
inventory
100
Ave ra ge
inve nto ry
(15 0 ) S afe ty 8 10 20 30 40
s tock
(50) Days
B. With variable lead time
Inve ntory
200 Ave rage

cycle
inve ntory
100
Ave rage
inve ntory S afe ty
(140) s tock 10 12 20 30 40
Days
(40)
C. With variable demand and lead time
Inve ntory
200
Average
cycle
inventory
100
Average
inventory 8 10 12 20 30 40
(200) Safety Days
s tock
(100)
FACTORS INFLUENCING SAFETY STOCKS
❏ Forecast error
❏ Exposure to stockout
❏ Lead time
❏ Service level requirement

RELATIONSHIP BETWEEN INVENTORY
INVESTMENT AND CUSTOMER SERVICE LEVELS
Inventory investment in units 1025
850
780
728
675
75 84.1 90.3 94.5 97.7

99.9 100
S e rvice pe rce ntage
Work Structure
■ How does the firm perform tasks and

activities?
■ What is the best way to apply tactical
resources to get work done?
Organizational Structure
■ Is the organization designed to facilitate

or hinder supply chain management ?
■ Cross-functional teams.
■ Interorganizational teams.
Product Flow Facility
■ Network structure for sourcing,

manufacturing, and distribution across
the supply chain.
■ Where should inventory be held?
■ Rationalization the supply chain.
Information Flow Facility
Structure
■ What information is passed through the
supply chain?
■ How is information passed through the
supply chain?
■ Frequency of update.
■ May be first component integrated
across the supply chain.
Product Structure
■ How is new product introduction

coordinated across the supply chain?
■ How does product fit with other other
products?
■ Product complexity
Management Methods
■ Corporate philosophy
■ Management techniques
■ Do they enhance or hinder supply chain
management?
■ Level of management involvement in
tactical supply chain issues.
Power & Leadership Structure
■ Channel captain
■ Source of power
Risk and Reward Structure
■ How are risks and rewards shared

across supply chain?
■ How are risks and rewards shared
through out the organization?
■ What are the risks and rewards?
■ What should suppliers and customers
risk?
Culture & Attitude
■ Compatibility of corporate cultures.

■ How are employees valued?
■ What are values of the firm?
Supply Chain Management as a
Strategic Weapon
■ Finance company
■ Outsourcing for nearly 100 years
Process Focus versus
Traditional Functions
■ Focus of every process is on meeting
the customers’ needs.
■ Traditional functional approach does not
focus on meeting the customers’ needs.
Customer Perspective
Market
Share
Customer Customer
Customer
Acquisition Retention
Profitability
Customer
Satisfaction
Balanced Scorecard
Financial
Objectives
&
Measures
Internal
Customer Vision & Business
Relationships and Strategy Processes
Measures
Learning
&
Growth
Balanced Scorecard
Strategic Framework
Clarifying
Vision &
Strategy
Strategic
Communicating Balanced Feedback
& Scorecard and Learning
Linking
Planning &
Target
Setting
Product Development &
Commercialization
■ Measuring development cost for new components
■ Measuring development time for new components
■ Determining component-level specs
■ Determining new introduction plans for products
■ Sharing component-level specs
■ Determining new product introduction performance objectives
■ Sharing estimated lifecycles for products
■ Determining product-level specs
■ Sharing new product introduction performance objectives
■ Sharing new introduction plans
■ Sharing product-level specs
■ Measuring product quality
Virtual Corporations
Raw Material/ Manufacturer Logistics
Assembly Supplier Services
Supplier Supplier
Financial Marketing
Services Brand Owner Service
Supplier Supplier
Human Information
Resource Distributor Service
Service Supplier
Supplier
TOTAL SUPPLY CHAIN
INVENTORY
Component Sales TYPICAL STOCK
CALENDAR DAYS
Suppliers Organization
? 65
50
Customers
Manufacturing
30 35
8
Factory Transit Delivery Local delivery
2
Material Finished Warehouse Wholesaler Retailer

Stocks Stocks
& WIP
190 DAYS SUPPLY

Turning Metrics into Money
■ What measurements should a supply chain
manager focus on?
■ Which performance measurements best translate
into bottom-line achievement?
■ For many managers, the measurements that are
used to determine their performance are not
really appropriate.
■ Measurements are often developed for ease of
use and not really good gauges of success.
Traditional Measurements
■ Standard costing systems
■ Management by variances can be
the enemy of good supply chain
management.
Shift…
■ Shift from treating financial (cost)

figures as only foundation for
performance to one of a broader set of
metrics.
■ Long-term success is not just based on
profitability. Rather it is based on
adherence to principles.
Where are Metrics Taken?

■ Might not be good enough to

measure within the firm.
■ Measure entire supply chain.
Don’t Measure Easy & Irrelevant
■ Don’t just measure
data that is easy to
measure.
■ What color was
that atomic bomb?
Redefine Tasks
“In knowledge and service work, however, the first
questions in increasing productivity - and working
smarter - have to be, ‘What is the task?
What are we trying to accomplish? Why
do it all?’”
“The easiest, but perhaps also the greatest,
productivity gains in such work will come from
defining the task eliminating what does not need
to be done.”
Source: Peter Drucker, The New Productivity Challenge, Harvard Business Review , November-
December 1991, p. 4.
It’s Easy to Be Wrong...
…even when the

data exists
Partner With the Front Line
■ Partner with people doing the work.

■ Front-line employees often know
intuitively when something is wrong.
■ Don’t just measure them, work with
them.
■ Do workers understand measurement
system? Rules-of-thumb?
Frequency of Measurement
■ Frequency of
reported
information should
follow operations
cycle.
■ Flood of data not
much better than a
drought.
Cost Allocations
■ Don’t allocate to a cost center if that

cost center has nothing to do with
process.
■ To value inventory, many firms first
allocate cost centers, then using cost
center burden rate, allocate to products.
Tools
■ Activity-Based Costing
■ Economic Value Added
■ Heuristics “Rules of Thumb”
■ Measurement “task force”
Make Measurements Real
“Too often we
enjoy the
comfort of
opinion without
the discomfort
of thought,”
Dashboard
Measurement Life Cycle
■ Measurements generally have a

discernible life cycle.
■ In the 3PL business, price is clearly more
important than it was five years ago.
Whiz-Kid Failure
■ Organized,
systematic,
measurement of the
wrong things can
lead to the undoing
of many years of
good, hard work.
■ “Systems” can be
dangerous.
Bucket Brigade
1858 Rumsey
fire wagon.
Supplied with
water by
bucket
brigade.
■ Information can move quickly inside the walls.

■ Data flow to “information machine” a bucket brigade.
■ Web allows move to shared data pipeline.
Sir Oracle
“I am Sir Oracle, And when

I ope my lips let no dog
bark!”
Gratiano, Shakespeare’s “Merchant of
Venice.”
Oracle is not a Silver Bullet
■ Results from ERP implementations

mixed.
■ True information integration is positive.
■ Supply chain management personnel

often lose functionality after ERP
implementation.
■ Drains resource
■ What will you get from Cornerstone?

Planning Systems
■ For aftermarket parts, planning systems

critical.
■ Can take you down wrong path.
■ System’s weakest link will drive
behavior.
Weak Link
■ Managing information more important than

managing inventory.
■ TRT
Enterprise Resource Planning
Packages
Pros Cons
■ Links planning, • Lacks functional demand
scheduling, and planning & scheduling
transactions to financials
• Very expensive when
■ Singular database modifications are needed
■ Links with customers/
• Implementation can take
vendors of similar ERP
years
Packages: Baan, SAP, Oracle, DAI, American Software,

JD Edwards, D&B Software, PeopleSoft,
MarCam, Ross Systems, Daly & Wolcott
Enterprise Resource Planning
Systems
■ Motivation is from top management
■ Many logistics managers believe that
they have to give up functionality when
moving to an ERP
■ “In-the-box” versus “Out-of-the-box”
“In-the-box” versus “Out-of-
the-box”
Warehouse
Mgt Network Design
Planning
Order Models
Order Entry Processing
Distribution
Performance
Planning Inventory Measurement
Management Systems Transportation
Management
Manufacturing
Production General Ledger
Management
Scheduling Systems
Process Change
■ It used to be a firm changed the systems to
match current business processes. Today,
many ERP installations have moved firms
to change business processes to match
the new system.
Systems Goal
■ Goal should be supply chain system -

not just corporate system.
■ Like an alcoholic, one step at a time.
Data Manipulation Tools
■ Good supply chain managers do not

have to rely on IT to get data analysis
completed.
■ Need to be able to use tools such as:
– Excel
– Access
– Planning tools
Accountancy Priesthood
■ Measurements
become a
“religion”
■ Measurements
exist to support
business - not
vice versa
When the Priests aren’t Satisfied
Measurements will Improve
■ Better technologies
■ Measuring the “right”
thing as opposed to the
“measurable” thing
■ Measurements have a life
cycle
■ Supply chain integration
■ Benchmarking
Customer Perspective
Market
Share
Customer Customer
Customer
Acquisition Retention
Profitability
Customer
Satisfaction
Balanced Scorecard
Financial
Objectives
&
Measures
Internal
Customer Vision & Business
Relationships and Strategy Processes
Measures
Learning
&
Growth
Balanced Scorecard
Strategic Framework
Clarifying
Vision &
Strategy
Strategic
Communicating Balanced Feedback
& Scorecard and Learning
Linking
Planning &
Target
Setting
Supply Chain Classifications
Margin
High Low
Long Niche Commodity Inventory holding

Life Cycle costs are stable
Rolex Lumber
Products
Short X-Mas trees,

Bread, Inventory holding
Life Cycle Dresses Fashion costs change over
Dresses
Products product life cycle
of product
What is the Value of
Integration?
■ Identify Supply Economic Value Added
Initiatives
Net
■ Quantify Impact on Operating Capital
Profits and/or Profit - Charge
Capital After
■ Quantify Impact on Taxes
Value
Economic
Profit
•Economic Value is created when a company deploys its
capital to create value in excess of capital costs
•Profit > cost of capital
Economic Value Added
■ Change in Economic Profit from year to

the next.
■ Economic profit
– NOPAT – capital charge
What is EVA?
■ EVA = Return - cost of capital employed

■ EVA is the value created by a business over
and above the required rate of return on
investors’ (Shareholders) capital.
■ EVA is a business performance measure that
gives the total economic view.
■ EVA is a decision making tool.
■ EVA links business planning/performance
with required shareholder return.
EVA Best Explains Changes in
Stock Market Value
Earnings per share 18%
Cash flow 22%
Return on Equity 35%
EVA 50%
Management of the Capital (Assets)
Invested in the Business is as Critical as the
Management of the Cost.
■ Capital includes the assets employed in
running the business
■ Working Capital includes Cash,
Inventory, Receivables, Payables
■ Fixed Assets include Land, Buildings,
Equipment, Vehicles
Logistics EVA
■ Will generally be negative is considered
independently from revenue generation.
– No revenue/no profit
– Operating expenses
– Major capital investment required in fixed assets and
lease commitments
■ Logistics must be part of the business design
that creates EVA within the business unit.
– Provide the logistics solution
– Minimize costs to maximize profits
– Minimize asset investment/Maximize asset
productivity
Logistics Can Be A Major
Contributor to EVA
Improvement
■ Cost
■ Services
■ Asset Management
One Firm’s EVA
Implementation Plans
■ Measure SCM EVA by business format, channel, and
function
■ EVA classes for all salaried and hourly SCM
personnel
■ Incorporate EVA measurement into CAPEX decision
models
■ Begin utilization of EVA for:
– Underutilized property decisions
– Private fleet decisions
– New DC’s
■ All SCM Field personnel introduced to EVA and
learning about their specific EVA drivers
Measurements Have To...
■ Fairly measure both cost and service.

■ Look past a manager’s span of control.
■ Incorporate business success measures
- not just “strikeouts”
Benchmarking
Flow Substitutions
Information
Forecast improvements, Pricing, deals, data sales
signaling
Inventory Finance
Consignment, credit terms, return policy
Source: Professor Hau Lee, Stanford University

Perfect Quality is Defined by
Whom?
■ When is the order frozen?
■ Speed of information versus speed of
manufacturing
■ Quality of product includes customer
satisfaction
Formalization
■ Group members
clearly understand
culture and mission
■ Understand
positioning
■ Rules & procedures
give freedom
Supply Chain Measurements
Area Measurement Type
Service Fill rate linear
Cost Logistics cost linear
Productivity Asset/Utilization Inventory linear
Productivity Asset/Utilization Recycling linear
Productivity Asset/Utilization Throughput – number of items sold linear
Time Response time linear
Time Cash-to-cash linear
Time Operating expense cost to convert inventory to linear
throughput
Productivity Asset/Utilization & ROA with 100% customer satisfaction linear
Service
Service & Time Order aging curve curve
Service & Time Line fill rate by time curve
Value Economic profit linear
What do Customers Want?
■ High levels of quality.
■ A high degree of flexibility (to adjust to
changes in volume or type of service
demanded).
■ High levels of service.
■ Low Costs.
■ Short response times, including time to
market for new services.
■ Little or no variability (deviation from target).
from: Richard J. Schonberger & Edward M. Knod, Jr. (1994) SynchroService! Irwin.
Service Defections
■ What is the cost of losing a customer?

■ What is the cost of a lost sale?
■ What are defectors telling you?
■ “Watch the door”
■ Do you have a “Zero defections
culture?”
Performance vs. Variety vs.
Lower Cost
Lower Cost
Performance Variety
New Model of Service
■ Value investments in people as much as investments
in machines, and sometimes more.
■ Use technology to support efforts of men and women
on front lines - and not just to monitor or replace
them.
■ Make recruitment and training as crucial for
salesclerks and housekeepers as for managers and
senior executives.
■ Link compensation to performance for employees at
every level, not just for those at the top.
Design for ….
■ DFM - Design for Manufacturability
■ DFSCM - Design for Supply Chain
Management
■ DFR - Design for Responsiveness
■ Design for Postponement
■ DFRL - Design for Reverse Logistics
Even
■ DFS - Design for Service
Design for Service
■ Put customers first. ■ Expanding IT

■ Focus on where and systems
how customers ■ Shifted from
interact with Manufacturing to
company. assembly.
■ “Value strategy” ■ Concentrate on
■ Flattened customers.
organization ■ Selective hiring &
liberal training.
Design for Responsiveness
Stages
Activity Transactional Inte ractive Inte rdepende nt
Info Sharing Information on Some sharing of process Extensive sharing of
component and product informat ion process info at both
specs shared strategic and tactical
levels
Decision Making Design decisions made Some collaboration with Supply chain structures,
independently partners to influence component specification,
design choices and detailed design
developed by consensus
and negotiation between
partners
Performance Performance measures Some use of Extensive use of
measures by product development performance measures to performance measures
not related to supply track time-to-availability tied to sharing of
chain performance and total lifecyc le costs rewards and risks
Technology Separate design Some sharing of Extensive use of
databases and systems analytical tools and technology to facilitate
accounting databases fast decision-making

Service Guarantees
■ Commit to “error-free” service.

■ Unconditional
■ Easy to understand and communicate.
■ Meaningful
■ Easy to invoke.
■ Easy to collect.
Customer Service Dimensions
■ Care and concern - employee friendliness,

courtesy, and warmth.
■ Initiative - employees ability and willingness
to jockey the system on customer behalf.
■ Problem solving - figuring out solutions to
customer problems whether unusal or
routine.
■ Recovery - going the extra yard.
Cost of Lost Customer
■ Costs 5 times more to replace a

customer than retaining one.
Service Recovery
■ Measure the costs of service recovery.

■ Break the silence.
■ Anticipate needs for recovery.
■ Act fast.
■ Train employees.
■ Empower the front line.
■ Close the loop.
■ Brilliant recoveries.
Order Management Cycle
Order Planning,
Sales
Post forecasting, Order
Sales Capacity Generation
Service planning
Cost
Returns Estimation
and Claims and
Pricing
Order
Billing Receipt
and
entry
Order
Order Selection
Fulfillment Scheduling and
Prioritization
Relationships Between
Competitors
conflict
competition
coexistence
cooperation
■ These characterizations can be thought
of as a continuum that ranges from collusion
conflict as the most competitive mode to
collusion where there is a total absence of
competition.
Identifying a service strategy
■ What attributes of service are - and will

continue to be - most important to our
target markets?
■ On which important service attributes is
the competition weakest?
■ What are the existing and potential
service capabilities of our company?
Defining a service strategy
■ What are the company’s integral service competencies? What are
the critical knowledge and skills that define and drive the firm both
philosophically and practically?
■ What are the company’s service incompetencies? What are the
knowledge and skill weaknesses?
■ What are the company’s resource strengths and weaknesses?
Finances, facilities, technologies, human and other resources
■ What is the company’s service reputation? How do customers,
noncustomers, and employees view service performance?
■ What is the company’s belief system? What is valued in the
organization? What is the company’s core culture?
■ What is the company’s service strategy? What is the “reason for
being” today?
Service Checklist
■ Is our service strategy clear & compelling to all of our
employees?
■ Does our service strategy deliver genuine value to customers?
■ Does our service strategy emphasize excellent service quality?
■ Do we live our service strategy in this company?
■ Does our service strategy demand superior achievement?
■ Does our service strategy differentiate our company from
competitors?
■ Do we reinforce our service strategy with explicit service
standards that guide and energize employees?
■ Do we reinforce our service strategy with appropriate symbols?
Push/Pull Boundary
Suppliers Manufacturing Distributor Retailer
Push/Pull Boundary
Postponement is the delay of the point of product

differentiation to a point further downstream in the
supply chain.
Profitable Customers
■ Up to 70% of a firm’s typical customers

are not at all profitable.
■ At a pharmaceutical distributor, only
30% of customers were profitable.
– Top 30% generated 261% of the profits
– Top 10% generated 151% of the profits
– Remaining 70% lost 161% of top 30 profits
Source: Hope & Hope, (1995) Transforming the Bottom Line. Harvard Business School Press
Real Costs of Inventory
■ At other electronics firms, inventory is a

serious concern to management
because real costs have been growing.
■ Do we know what real costs of inventory
are?
Life-Cycle Management
■ Selecting & implementing supply-chain

management strategies appropriate to
life-cycle stage.
Electronics Product Life Cycle
4
2
4
Development Volume Shipments End of Life
Life Cycle Support
Chasm
■ consist of expenses such as:

– cost of money,
– insurance,
– taxes,
– shrinkage,
– warehousing, and
– obsolescence.
Inventory Driven Carrying
Costs
Product
100% Salvaged
Bargain
Basement
Discounts
50% Product Product
Introduction Obsolescence
And Volume
Sales
0%
Time
Product Responsibility Curve
Product Responsibility Curve
Product Life Cycle

End of
Responsibility
End of Life
Birth
Elements of Industry Structure Rivalry Determinants
Entry Barriers •Switching Costs
•Switching Costs New Entrants •Industry Growth
•Economies of Scale •Fixed Costs/Value Added
•Proprietary product differences •Intermittent Overcapacity
•Brand Identity •Product Differences
•Capital Requirements •Brand Identity
•Access to Distribution •Concentration and Balance
•Absolute Cost Advantages •Informational Capacity
•Government Policy •Corporate Stakes
•Expected Retaliation ■ Industry •Exit Barriers
Competitors
Buyers
Suppliers ■ Intensity of
Rivalry Determinants of Buyer Power
Determinants of Supplier Power •Bargaining Leverage
•Switching Costs of Suppliers •Switching Costs
•Differentiation of Inputs Determinants of •Buyer Volume
•Presence of Substitute Inputs Substitution Threat •Buyer Concentration
•Supplier Concentration •Switching Costs •Buyer Information
•Importance of Volume to Supplier •Relative Price •Ability to Integrate Backward
•Cost Relative to Total Purchases Performance of Subs •Substitute Products
•Impact of Inputs on Costs •Buyer Propensity •Price Sensitivity
or Differentiation to Sub
•Threat of Forward Integration Substitutes
Supply Chain Challenges
Increasing Information Logistics
Product Variety Distortion Complexities
(Bullwhip Effect)
Geographical Increasing demand Complex global
market variability upstream supply chains with
preferences, local in supply chain multiple sites, flows,
govt regulations borders, modes
Diverse customer Beer-game, Complexities in
preferences whiplash effect labor management,
laws, cultures
Short & overlapping What you see is not
product life cycles what they see
Bullwhip impact
worsens with long
cycle times
Symptoms: Curses & Paralyses
Variety Proliferation Information Logistics
Distortion Complexity
Forecasting Inventory piling up Long lead times
nightmare
High mfg cost Service degradation High Logistics costs
High inventories Wasteful resources Excessive overhead
Poor customer Poor capacity

service planning
High obsolescence Inefficient scheduling
& transportation
High product support Misinformed market
& service costs value
LEAP (Leading Edge Advanced
Procurement)
■ Total cost of ownership
■ Facilitate virtualization
■ ERS - Evaluated Receipt Settlement -
pay in X days after receipt of goods
■ Life cycle management
■ Supply chain integration
■ Eliminate transaction processing
■ Web-based procurement (Ariba, etc.)
Invoice Payment
■ In Europe, shared services center

processes 200,000 invoices/year
■ Soon to be 350,000 invoices/year
Types of Organizational
Problems
■ Technical - routine or possibly expert
methods exist.
■ Adaptive - routine methods do not exist
and challenge is to effectively mobilize
community to solve the problem.
■ Hybrid - problem requires a combination
of technical and adaptive leadership to
be “solved”.
Problems
■ Technical problems are solved well

through authority.
■ Adaptive problems require a change in
behavior.
Solving Problems
Action Technical or Routine Adaptive
Direction Define problem Identify adaptive

challenge
Protection Shield org from threat Let org balance
external pressures
Orientation Clarify roles to Challenge current
respond roles and resist
pressure
Managing Conflict Restore order Expose conflicts
Maintain Norms Maintain norms, Challenge

social network unproductive norms;
modify social network
Source: Dr. Corey Billington, Hewlett-Packard
2,000/200,000 Problem
■ At Ford, FCSD buyers looking for 2,000

parts with many special requirements
while Assembly plants want 200,000
with less hassle to the supplier.
■ Purchasing job much tougher.
■ Must emphasize other issues besides
cost savings.
■ Creativity required.
Forecasting
■ Forecasting never works.

■ Investigate nonlinear methods
Computer Business Increasingly
Complex & Competitive
■ Technology ■ Product
– Rapid Innovation – Multiple channel
– Differentiated to commodity structures
product – Demand distortion
– Short product life cycles – Collapse of the middle
– 30% reduction per year in
resale value
■ Customer ■ Supply Chain

– Increasingly – Transition from vertically-
sophisticated integrated to network
structure
– Demanding unique
configurations – Globalization
– Product proliferation – Concentration of suppliers
Integration Opportunities
■ Compress supply chain structure
■ Collaboration planning forecasting &
replenishment
■ Joint capacity planning
■ Product development is an integration
opportunity
Integration Opportunities
■ Compress Supply Chain ■ Collaboration, Planning,
– Internal postponement Forecasting & Replenishment
– External postponement – Collaborative demand planning
– Sales agent – Synchronized order fulfillment
– Direct & replenishment
– Joint capacity planning
■ Product Development is Integration

Opportunity
– Supply Chain structural analysis
– Design for postponement/manage
product variety
– Use standard & intergenerational parts &
suppliers
Demand Planning
■ Today, distributors build financial plans which drive
category and assortment planning, driven by sales
history.
■ Manufacturers build a financial plan based on market
demand and / or account projections that drive
production planning.
■ These processes all affect the ability to execute at
shelf level, yet the business processes and systems
are not integrated.
■ The lack of integration creates natural disconnects in
the supply chain causing excessive response times,
costs and inventory.
Collaborative Planning,
Forecasting, &
Replenishment
■ Process model – How and where forecast collaboration
fits into supply chain processes
■ Front-end agreements – Changes to trading partner
agreements to support, define, and measure
collaboration.
■ Data Sharing – Definition of the data elements to be
shared to support collaboration
■ Common Metrics – Definition of measures to ensure
achievement of objectives of collaboration: a) reduce
supply chain inventories, and b) increase sales and
profits.
■ Rule Sets – Defines how partners will determine which
forecasts require collaboration (exception selection)
CPFR Critical Metrics
■ Results-oriented ■ Process-oriented
metrics metrics
– Out of stock on store – Order forecast
shelf accuracy
– Inventory turns – Order fill rates to each
consolidated across inventory holding
value chain location
– Total value-chain cycle – Cycle time for each
time process activity
– Sales forecast – Process cost
accuracy
– Profitability
– Return on assets
Forecasting, & Replenishment
■ Method to improve alignment of supply and demand.
Supply-Demand Mismatch Supply-Demand Alignment

•Short product life •Shared forecasting &
cycles demand
•Product shortages •Synchronized order
•Independent planning fulfillment
& execution decisions •Joint capacity planning
■ Supply-Demand alignment can significantly impact

bottom-line.
■ In Stanford University study, collaborative planning is
estimated to reduce each segment of the PC industry
inventory investment 10 to 25 percent and increase
EVA from $135 to $330M.
■ Turns improve 33%
Source: Andersen & Stanford CDDN Study, 1997.
Collaborative Planning
■ Forecasting, order fulfillment and capacity planning
are opportunity areas within Collaborative Planning
that partners are using to improve supply chain
performance.
Forecasting
Synchronized Joint
Order Capacity
Fulfillment Planning
Collaborative Planning Stages
Activity Transactional Interactive Interdependent
Info Sharing Minimal info shared for Some sharing of demand Extensive sharing of
demand forecasting info (e.g., historical demand and promotional
sales, forecast info
assumptions)
Decision Making Demand forecast Some collaboration with Demand forecast
developed independent partners to influence developed by consensus
of partners demand forecast and negotiation among
partners
Performance No performance Some use of Extensive use of
measures measures used performance measures to performance measures
track forecast accuracy linked to shared risks
and rewards among
partners
Technology Limited use of Some use of EDI to Extensive use of
technology share/transmit demand technology including
info EDI, web, demand
planning tools

■ Improves alignment of supply & demand
■ Moves firm from transactional to
interdependent activities
■ Positive bottom-line impact
■ Large value creation resulting from
synchronization and fewer assets
Integration Issues
■ Some passive interfaces, but very little

true integration.
■ Where there are points of integration,
these points often allow no reaction time
to correct divergent paths to the extent
of satisfying consumer demand.
Integrate Business Processes
■ Jointly managed business processes must be defined.
– Leverage the competencies, systems and resources of each trading
partner
– Facilitate collaboration on planning , forecasting, and replenishment
■ Standards for the sharing of information (data formats)
must be defined to facilitate the collaboration process.
■ Methods of integrating results of collaboration into
operational systems of both the distributors and suppliers
must be developed.
■ Key performance measures for joint, co-managed supply
chain activities must be defined and agreed upon.
Supply Chain Operations
■ Traditional aggregate forecasting &

replenishment
■ Vendor-Managed Inventory (VMI)
■ Jointly-Managed Inventory (JMI)
Aggregate Forecasting &
Replenishment
■ Data aggregated to product family or
brand level, by week or month, by
region
■ Data inaccuracy hidden by aggregation
process
■ Conventional DRP or push-based
planning
Inventory Management Methods
Bus Aggregate Vendor Managed Jointly Managed
Plan Forecasting Inventory Inventory
Assemble Syndicated data & POS, whse POS data by
Data historical sales withdrawl data,, product, store &
syndicated data week
Sales SF at high level of Product,Cus DC, by Store level by week
Forecst detail week by product
Order Focus on mfg Focus on retailer Time-phased
forecast support within firm DC by invenotry & replenishment of
cost targets stores & all DC’s
Order Retailer assumes Pull from store Either party based
Gen 100% fulfillment replenishment or on store level sales
consumer dmd that are time
phased
Order Available at Priority to VMI From DC or mfg
Fulfillment
supplier DC customer from depnding on
supplier DC’s integration plan
Source: CPFR Draft, 1/98
Compressed Supply Chain
■ May change which firm or organization within the
firm own sales and customer relationships
■ May change which firm or organization within the
firm own order fulfillment and final configuration
■ Reduces inventory investment
■ Increases value by providing a clearer signal of
customer demand
■ Greater flexibility through delayed product
differentiation
■ Utilizes postponement
Internal Postponement
■ Internal postponement reduces inventory investment by
delaying product differentiation and final configuration
from traditional manufacturing site to internal
distribution centers
■ Delays customization of finished goods and installation
of the most expensive and fastest-depreciating
components
■ Delayed customization allows supply chain to
accommodate more demand variability with less
inventory
■ Raw increases & FGI decreases resulting in overall
reduction in inventory
Design Principles
■ Process Design Principles
– Keep the view of entire supply chain in mind...extend to the
process’ customer’s customer; supplier’s supplier...
■ Question everything.
– Why is this process done at all?
– Why is it done here?
– Why is it done by that person?
– Why is it done in this sequence?
– Adding value or adding cost?
– Is the customer willing to pay for it?
Product Development
■ Opportunity to integrate supply chain

■ Improves procurement
■ Firms that design products with supply
chain performance issues in mind can
improve time to availability
Order Fulfillment Stages
Info Sharing Limited to basic order Some sharing of Extensive sharing of
info inventory availability inventory, shipment and
and shipment info sell-through info
Decision Making Independent order Some negotiation of Synchronized ordering
decisions – “Phantom order decisions among decisions driven by
Demand” partners shared replenishment
policies, channel
inventory data and POS
data (VMI/JMI)
Performance Limited performance Some shared Extensive use of
measures measures performance measures performance measures
like lead times, on-time tied to shared risks and
delivery, and inventory rewards
availability
Technology Limited use of Some use of technology Extensive use of
technology to track orders and technology to allow real-
material flow time tracking or orders
and material and
automatic replenishment

Capacity Planning Stages
Info Sharing Limited capacity info Some sharing of Extensive sharing of
capacity info for capacity info including
materials, ability to flex up or
manufacturing, and down
logistics resources
Decision Making Independent of partners Some shared decision- Extensive use of shared
and reactive short-term making about material capacity decisions
commitments contracts, manufacturing characterized by flexible
and logistics resources; contracts, outsourcing,
may include outsourcing and contingency
planning
Performance Limited to internal Some measures related Extensive use of
measures partners to reliability and quality performance measures
tied to sharing of
rewards and risks
Technology Limited to internal Some use of technology Use of transaction and
partners to share info like EDI decision support systems
that provide support for
capacity planning

Ten Dimensions of Service
Quality
Tangibles: Appearance of physical facilities, equipment, personnel, and
communication materials.
Reliability: Ability to perform the promised service dependably and accurately.
Responsiveness: Willingness to help customers and provide prompt service
Competence: Possession of the required skills and knowledge to perform the
service.
Courtesy: Politeness, respect, consideration, and friendliness of contact
personnel.
Credibility: Trustworthiness, believability, honesty of the service provider.
Security: Freedom from danger, risk, or conflict.
Access: Approachability and ease of contact.
Communication: Keeping customers informed in language they can understand
and also listening to them.
Understanding the Customer: Making the effort to know customers and their
needs.
From: Zeithaml, Parasuraman, and Berry. (1990). Delivering Quality Service. New York: The Free Press
Predictions - 1994
■ Information technology critical

■ Look for niches
■ Convergence
■ Outsourcing will increase
■ Focus Speed - Time-Based Competition
■ Prerequisite Service Quality
■ Global Challenge
How has the Business changed
since 1994?
■ More sophisticated
■ Systems much bigger issue
■ Getting into businesses that would not have 5
years ago
■ International demands
■ Customers want more better, faster, cheaper
■ Customers say they want to be more
integrated
■ Value-added services growing
New Value-Added Services
■ Offerings that used to be value-added

services are now considered to be a
normal part of everyday business.
■ New value-added services such as
inventory financing
Add Services that Enhance Core
Businesses and Increase
Capabilities
● Understand Mission - Articulate Service
Philosophy
● Set Multiple and Measurable Objectives
● Assist Customer in Understanding
Possibilities
● Concentrate on Winners
● Benchmark
Long-Term Competitive Edge
■ With rare exception, products cannot be the
source of long-term competitive edge.
■ Superior products can usually provide only a
temporary advantage
■ Service-based strategies are more permanent
Market Share vs. Customer Share
TOTAL
9%
13%
50%
28%
" Often price-based ☺ Built on relationship with

customers
" Rarely establishes loyalty
☺ Allows a more tailored
" Easy to defect solution
☺ Increases switching costs
Understand Profits
● Know how profitable each customer

is
● Know how profitable all your
services are
Differentiate Customers, Not
Just Services
● Make sure all levels of firm “know”

your customers.
● Determine which customers are
more valuable than others.
● Make sure you know the value of
retaining each customer.
Share of Customer
● Identify potential customers

– Basic services
– Value added services
● Link customers’ identities to their
transactions with you
● Learn about your customers’
businesses with competitors
● Collaborate with customers
Partnerships
■ Some firms believe that they are involved in real
partnerships.
■ To customers, partnershipping does not imply
equality.
■ Honest disclosure of costs
■ Co-manage productivity
■ Profit sharing
■ Incentives
Satisfying Customers
■ Different customers buy different kinds of
value. You can’t hope to be the best in all
dimensions, so you choose your customers
and narrow your value focus.
■ Customers are no longer “one size fits all.”
■ Customers define customer service
■ Many firms have difficulty communicating with
their customers. Customers have a tendency
to forget about extra services and assume
that those duties are part of normal service
levels.
Satisfying Customers
■ Customers select third party logistics firms based on
customer service, knowledge, management strength,
systems, location and price. While most customers
stress issues other than price, reasonable cost is
always expected.
■ As value standards rise, so do customer
expectations. You can stay ahead only by moving
ahead.
■ Producing an unmatched level of a particular kind of
value requires a superior operating model - a
“machine”- dedicated to just that kind of value.
Third Party Value Chain
Logistics Solutions
■ Third Party's value chain solutions fall
into three major categories
– logistics programs,
– facility-based services and
– transportation management and operation
■ all supported by flexible information
systems that provide functionality and
allow integration across functions and
companies.
1994 Selection Factors
Factor Mean Std Dev
Service quality 6.44 0.98
Reliability 6.41 0.97
On time performance 6.32 0.98
Good communication 6.02 1.16
Customer support 5.93 1.18
Speed of service 5.90 1.04
Flexibility 5.87 1.17
Management quality 5.83 1.14
Willingness to customize service 5.67 1.17
Order cycle time 5.66 1.31
Price 5.65 1.20
Easy to work with 5.54 1.25
Location 5.52 1.30
Cost reduction 5.43 1.34
Vendor reputation 5.40 1.28
Special expertise 5.33 1.33
Systems capabilities 5.09 1.36
Personal relationships 5.02 1.47
Technical competence 4.96 1.43
Variety of available services 4.81 1.40
Early notification of disruptions 4.58 1.77
Decreased labor problems 4.56 1.64
Decreased asset commitment 4.55 1.49
Increased competition 4.36 1.51
Global capabilities 3.00 1.75
1999 Selection Factors
Scale of 1 to 7
Factor Mean Factor Mean

Service quality 6.36 Special expertise 5.37
Reliability 6.29 Vendor reputation 5.34
On time performance 6.20 Easy to work with 5.33
Price 5.98 Systems capabilities 5.30
Flexibility 5.81 Technical competence 5.15
Cost reduction 5.80 Personal relationships 4.92
Management quality 5.78 Variety of services 4.86
Speed of service 5.73 Early notification disruptions4.64
Order cycle time 5.68 Decreased assets 4.61
Good communication 5.67 Decreased labor problems 4.58
Customer support 5.62 Increased competition 4.32
Location 5.61 Global capabilities 3.08
Customize service 5.53
International demands
■ 3rd parties have to
prepare to serve
international
markets.
■ Many customers
want to move to
fewer providers
Flexibility
■ 3rd parties cannot easily define

themselves much anymore. They
have to be flexible, quick, and nimble.
Special Qualities of Services
$ Intangilibility
$ Inseparability
$ Heterogeneity
$ Perishability
Intangibility of Services
Marketing Problems Marketing Strategies
● Cannot be stored ● Stress tangible cues.

● Cannot be protected ● Use personal sources
more than non-personal
through patents sources.
● Cannot be readily ● Simulate or stimulate
displayed or word-of-mouth
communicated communications.
● Prices are difficult to ● Create strong
organizational image.
set
● Use cost accounting to
help set prices.
● Engage in postpurchase
communications.
From: Zeithaml, Parasuraman, Berry. Problems and Strategies in Services Marketing. Journal of Marketing, (Spring 1985)
Inseparability of Services
● Customer involved in ● Emphasize selection and

production. training of public contact.
● Other customers ● Manage customers.
involved in production. ● Use multisite locations
● Centralized mass
production of services
difficult.
Heterogeneity of Services
● Standardization and ● Industrialize service

quality control difficult to (standardizing certain
achieve. common services).
● Customize service.
Perishability of Services
● Services cannot be ● Use strategies to cope

inventoried. with fluctuating demand.
● Make simultaneous
adjustments in demand
capacity to achieve
closer match between the
two.
Relationships Between
Competitors
conflict
competition
coexistence
cooperation
■ These characterizations can be thought of as a collusion

continuum that ranges from conflict as the most
competitive mode to collusion where there is a total
absence of competition.
Service Mapping
■ Visualize the interaction of the customer and the
service system from the point of view of the
customer.
■ Insure that all aspects of the service system add
value to the customer’s experience of the service
which the company intends to deliver.
■ Identify the points at which the service system might
break down, or otherwise fail to produce the intended
value for customers.
Service Map Format
Activities which can be directly
perceived by customers, including
customer interaction
Line of visibility
Activities which are invisible to

customers
Service Process Fail Points
■ Process does not add value to customers.

■ Customer involvement does not support
service concept.
■ Inadequate integration between customer
involvement and the service system.
■ Operations infrastructure is poorly defined.
Does Not Add Value
■ No clear vision of level of service

■ Vision not accepted totally within the
organization
■ Not every activity designed with
objective of service speed in mind
Customer Involvement Does
Not Support Service Concept
■ Interaction with customer is “cluttered”
■ Too many steps for customer
■ Too complex
Inadequate Integration Between
Customer Involvement and the Service
System
■ Poor communication linkages between

first line customer service providers and
the rest of the organization.
■ Potential customer needs not
anticipated and integrated into the
service system
Operations Infrastructure Is
Poorly Defined
■ Systems and procedures overly

complicated.
■ System designed according to criteria
which have little to do with meeting
customer needs.
Service-Profit Chain Audit
■ How do we define loyal customers?
■ Do measurements of customer profitability include
profits from referrals?
■ What proportion of business development
expenditures are directed to the retention of existing
customers?
■ Why do our customers defect?
■ Are customer satisfaction data gathered in an
objective, consistent, and periodic fashion?
■ Where are the listening posts for obtaining customer
feedback in your organization?
■ How is information concerning customer satisfaction
used to solve customer problems?
■ How do you measure service value?
■ How is information concerning customers’
perceptions of value shared with those responsible
for designing a product or service?
■ To what extent are measures taken of differences
between customers’ perceptions of quality delivered
and their expectations before delivery?
■ Do the organization’s efforts to improve external
service quality emphasize effective recovery from
service errors in addition to providing a service right
the first time?
■ How do you create employee loyalty?
■ Have we made an effort to determine the right level
of employee retention?
■ Is employee satisfaction linked to customer
satisfaction with enough frequency to establish trends
for management use?
■ To what extent are measures of customer
satisfaction, customer loyalty, or the quality and
quantity of service output used in recognizing and
rewarding employees?
■ Do employees know who their customers are?
Leadership Audit
■ To what extent is the firm’s leadership”
– energetic, creative vs. stately conservative?
– participatory, caring vs. removed, elitist?
– listening, coaching, and teaching vs. supervising and
managing?
– motivated by mission vs. motivated by fear?
– leading by means of personally demonstrated values vs.
institutionalized policies?
■ How much time is spent by the organization’s leadership
personally developing and maintaining a corporate
culture centered around service to customers and fellow
employees?
Service Laws
■ First Law of Service

Satisfaction = Perception - Expectations
■ Second law of Service
It’s Hard to Play Catch-Up Ball
Waiting
“Waiting is frustrating, demoralizing,

agonizing, time consuming, and
incredibly expensive.” Federal Express
Commercial
Principles of Waiting
■ Unoccupied time feels longer than occupied
time.
■ Pre-process waits feel longer than in-
process waits.
■ Anxiety makes waits seem longer.
■ Uncertain waits are longer than known,
finite waits.
■ Unexplained waits are longer than
explained Fwaits.
■ Unfair waits are longer than equitable waits.
■ The more valuable the service, the longer I
will wait.
■ Solo waiting feels longer than group
waiting.
Service Defections
■ What is the cost of losing a customer?

■ What is the cost of a lost sale?
■ What are defectors telling you?
■ “Watch the door”
■ Do you have a “Zero defections
culture?”
Loyalty
■ Loyalty integral to to firm’s basic business strategy.
■ Economic benefits.
■ Select the “right” customers.
■ Demand management
■ Who can you deliver “superior value” to?
■ Customers build trust with employees - not
executives
Loyalty Measures
■ Understand cause-and-effect relationships between
loyalty and profits.
■ Retention rate
■ Share of purchases
■ Repeat purchases
■ Referrals
■ Customer acquisition costs
■ Customer service employee retention
New Model of Service
■ Value investments in people as much as investments
in machines, and sometimes more.
■ Use technology to support efforts of men and women
on front lines - and not just to monitor or replace
them.
■ Make recruitment and training as crucial for
salesclerks and housekeepers as for managers and
senior executives.
■ Link compensation to performance for employees at
every level, not just for those at the top.
Identifying a service strategy
■ What attributes of service are - and will

continue to be - most important to our
target markets?
■ On which important service attributes is
the competition weakest?
■ What are the existing and potential
service capabilities of our company?
Defining a service strategy
■ What are the company’s integral service competencies? What are
the critical knowledge and skills that define and drive the firm both
philosophically and practically?
■ What are the company’s service incompetencies? What are the
knowledge and skill weaknesses?
■ What are the company’s resource strengths and weaknesses?
Finances, facilities, technologies, human and other resources
■ What is the company’s service reputation? How do customers,
noncustomers, and employees view service performance?
■ What is the company’s belief system? What is valued in the
organization? What is the company’s core culture?
■ What is the company’s service strategy? What is the “reason for
being” today?
Service Checklist
■ Is our service strategy clear & compelling to all of our
employees?
■ Does our service strategy deliver genuine value to customers?
■ Does our service strategy emphasize excellent service quality?
■ Do we live our service strategy in this company?
■ Does our service strategy demand superior achievement?
■ Does our service strategy differentiate our company from
competitors?
■ Do we reinforce our service strategy with explicit service
standards that guide and energize employees?
■ Do we reinforce our service strategy with appropriate symbols?
Principles of Great Service
■ Reliability
■ Tangibles
■ Responsiveness
■ Assurance
■ Empathy
Add Services that Enhance
Core Businesses and Increase
Capabilities
● Understand Mission - Articulate Service
Philosophy
● Set Multiple and Measurable Objectives
● Assist Customer in Understanding

Possibilities
● Concentrate on Winners
● Benchmark
Vantage Points
Competition
View
Finance
Finance
View
View
Complete
Complete Customer
Customer
Customer
Customer View
View
Order
Order
Fulfillment
Fulfillment
Operations
Operations
View
View
Partner
Partner
View
View
Company Confidential
5
Dell Computer
5
■ 14 days of inventory throughout the system. For
monitors, they are moving from 18 days of inventory
in 1996 to five days of inventory.
■ Dell does not pay anyone for 45 days but they
demand instant payment from customers.
■ Dell managed to save 25% of transportation costs
after moving to UPS monitor ship program.
■ Dell has a single focus on keeping inventories lean.
Everyone is focused on the same indices which
measure how lean they run their inventories.
■ Dell’s build cycle is two days on most systems
■ Selling $4,000,000 via the internet
Value Migration
The Collapse of the Middle
The Age of Manufacturing :
In the age of
Value manufacturing, the
traditional sales force was
the dominant go-to-market
mechanism.
Low-cost Traditional High-End
Distribution Sales Force Solutions
The Age of Distribution :

In the age of distribution,
Value value has shifted to low-
cost distribution and high-
end solutions.
Low-cost Traditional High-End

Distribution Sales Force Solutions
■ Generally, don’t get it right first
time.
■ Able to shift resources quickly.
■ Manage to revenue/employee.
NIKE
■ 60-90 day product life cycles.
■ 9-13 month product development
cycles.
■ Customer Management - Sell “one less”
than market wants
■ Completely outsourced (almost)
■ Niketown
■ Nike outlet stores
COMPETITION
■ Who do you perceive as competition?
■ Who is eroding your market share?
■ What customer needs are being
addressed by these other players in
your space?
■ Do they have any “customer facing”
app’s?
■ How easily can they change their value
add? How easily can your company?
Branding Services
■ Develop service brands

■ Sunkist & Kodak Colorwatch System
Pricing
■ Understand value of services.

■ Market-based pricing vs. cost-based
pricing vs. activity-based pricing
■ What value are you adding to
customer? What should they pay for?
What is the competition doing?
Standardize Services
■ For operational ease and effectiveness,

standardize services as much as
possible.
■ Goes against Unisys way.
■ May be naïve.
■ Make sure all personnel understand
how services are manufactured and
delivered.
Preserve the Core/Stimulate
Progress
Stimulate
Progress
Preserve
the core
STRATEGIC PROFIT MODEL SALES
NET SALES
(The DuPont Model) GROSS
MARGIN $
NET PROFIT $
–
$ COST OF
NET PROFIT GOODS SOLD
MARGIN –
/ $
%
TOTAL
NET SALES EXPENSES
net profit
RETURN ON FINANCIAL RETURN ON ( net sales ) $
NET WORTH LEVERAGE ASSETS $
= X % TIMES
INVENTORY
NET SALES
( net profit
net worth ) ( total assets
net worth ) CURRENT $
$ ASSETS
ASSET
TURNOVER +
$ ACCOUNTS
/
RECEIVABLE
TOTAL
ASSETS +
net sales $
( total assets ) FIXED
$ ASSETS
+
OTHER CURRENT
$ ASSETS
$
Selected Financial Data for Manufacturers, Wholesalers,
and Retailers for 1997 ($ Millions)
Net Profits as a Total Inventory Inventories as a
Companies Sales Net Profits Percent of Sales Assets Investment Percent of Assets
Manufacturers
Abbott Laboratories 11,883 2,094 18% 12,061 1,280 11%
Borden 1,488 221 15% 2,206 302 14%
Clorox 2,741 298 11% 3,030 212 7%
Dresser Industries 7,458 318 4% 5,099 972 19%
Ford Motor 153,627 6,920 5% 279,097 5,468 2%
General Electric 90,840 8,203 9% 304,012 5,895 2%
General Mills 6,033 422 7% 3,861 389 10%
Goodyear Tire & Rubber 13,065 559 4% 9,917 1,835 19%
Harris Corp. 3,939 133 3% 3,784 604 16%
Honeywell 8,028 471 6% 6,411 1,028 16%
NCR 6,598 7 0.11% 5,293 489 9%
Newell 3,234 290 9% 3,944 625 16%
Pfizer 12,188 2,213 18% 15,336 1,773 12%
Sara Lee 20,011 (523) -3% 10,989 2,882 26%
Xerox 18,166 1,452 8% 27,732 2,792 10%
Wholesalers and Retailers
Baxter International 6,138 300 5% 8,707 1,208 14%
Bergen Brunswig 11,661 82 1% 2,707 1,309 48%
Dayton Hudson 27,757 751 3% 14,191 3,251 23%
Fleming Companies 15,372 25 0.16% 3,924 1,019 26%
Kmart 32,183 249 1% 13,558 6,367 47%
Nordstrom 4,852 186 4% 2,865 826 29%
Sears, Roebuck 41,296 1,188 3% 38,700 5,044 13%
Super Value Stores 17,201 231 1% 4,093 1,116 27%
Wal-Mart Stores 117,958 3,526 3% 45,384 16,497 36%
Winn-Dixie 13,219 204 2% 2,921 1,249 43%
NORMATIVE MODEL OF INVENTORY
CARRYING COST METHODOLOGY
Capital
Inventory Investment
Costs
Inventory Insurance
Service
Costs Taxes
INVENTORY Plant Warehouses

CARRYING
COSTS Storage Public Warehouses
Space Costs Rented Warehouses
Company Owned
Warehouses
Obsolescence
Inventory Damage
Risk Costs Pilferage
Relocation Costs
SUMMARY OF DATA COLLECTION
PROCEDURE
Step
No Cost Category Source Explanation Amount (Current Study)
1. Cost of Money Comptroller This represents the cost of having money invested 30% pretax
in inventory and the return should be comparable to
other investment opportunities.
2. Average 1. Standard cost data -- comptroller's Only want variable costs since fixed costs go on $7,800,000 valued at variable cost
monthly department regardless of the amount of product manufactured delivered to the D.C. (Variable
inventory valued 2. Freight rates and product specs are and stored -- follow steps outlined in body of report. manufactured cost equaled 70% of
at variable costs from distribution reports full manufactured cost. Variable
delivered to the 3. Average monthly inventory in cases cost FOB the DC averaged 78% of
distribution from printout received from sales full manufactured cost)
center forecasting
3. Taxes The comptroller's department Personal property taxes paid on inventory $90,948 which equals 1.1667%
4. Insurance The comptroller's department Insurance rate/$100 of inventory (at variable costs) $4,524 which equals 0.058%
5. Recurring Distribution operations This represents the portion of warehousing costs $226,654 annually which equals
storage (public that are related to the volume of inventory stored. 2.893%
warehouse)
6. Variable storage Transportation services Only those costs that are variable with the amount Nil
(plant of inventory stored should be included.
warehouses)
7. Obsolescence Distribution department reports Cost of holding product inventory beyond its useful 0.800% of inventory
life
8. Shrinkage Distribution department reports Requires managerial judgment to determine the
portion attributable to inventory storage. $100,308 which equals 1.286%
9. Damage Distribution department reports Requires managerial judgment to determine the
portion attributable to inventory storage.
10. Relocation costs Not available Only relocation costs incurred to avoid Not available
obsolescence should be included.
11. Total carrying Calculate the numbers generated in steps 36.203%
costs 3, 4, 5, 6, 8, 9 and 10 as a percentage of
average inventory valued at variable cost
delivered to the distribution center and add
them to the cost of money (step 1).
ABC COMPANY
A) Calculate the inventory carrying cost percentage for the ABC Company given the
following information:
– finished goods inventory is $28 million valued at full manufactured cost;

– based on the inventory plan, the weighted average variable manufactured cost per case is 65
percent of the full manufactured cost;
– the variable transportation cost incurred to move the inventory from plants to warehouse
locations close to customers was $1,500,000;
– the variable cost of moving the inventory into these warehouse locations was calculated to be
$300,000;
– the company was currently experiencing capital rationing and new investments were required
to earn 15 percent after taxes;
– personal property taxes paid on inventory were approximately $200,000;
– insurance coverage to protect against loss of inventory was $100,000;
– storage charges at public warehouses totalled $500,000;
– variable storage in plant warehouses was considered to be negligible;
– obsolescence was $100,000;
– shrinkage was $100,000;
– damage related to inventory storage was $50,000;
– transportation costs associated with the relocation of field inventory to avoid obsolescence
was $50,000; and,
– the marginal tax rate is 40%.
B) Would it be a good decision to spend $720,000 per year in increased production set-
up costs and premium transportation costs in order to achieve an inventory reduction
of 10%?
THE IMPACT OF INVENTORY TURNS ON
INVENTORY CARRYING COSTS
Inventory Average Carrying Cost Carrying Cost
Turns Inventory at 40 Percent Savings
1 $750,000 $300,000 -
2 375,000 150,000 $150,000
3 250,000 100,000 50,000
4 187,500 75,000 25,000
5 150,000 60,000 15,000
6 125,000 50,000 10,000
7 107,143 42,857 7,143
8 93,750 37,500 5,357
9 83,333 33,333 4,167
10 75,000 30,000 3,333
11 68,182 27,273 2,727
12 62,500 25,000 2,273
13 57,692 23,077 1,923
14 53,571 21,428 1,649
15 50,000 20,000 1,428
RELATIONSHIP BETWEEN INVENTORY
TURNS AND INVENTORY CARRYING COSTS
Inventory carrying costs
$300,000
$275,000
$250,000
$225,000
$200,000
$175,000
$150,000
$125,000
$100,000
$75,000
$50,000
$37,500
$25,000
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Inventory Turns
ANNUAL INVENTORY CARRYING COSTS
COMPARED TO INVENTORY TURNS
Holding Costs
(per unit)
$30.00
Variable Manufacturing Cost $100

Carrying Cost % 30%
Annual Cost to Carry in Inventory $30
Monthly Cost (1/12) $2.50
15.00
12.50
10.00
7.50
6.00
5.00
3.75
2.50
0
1 2 3 4 5 6 7 8 9 10 11 12
Inventory Turnovers
Marketing
Product
Price Promotion
Place
Customer Service
Levels
Logistics

Costs Costs
Order Processing
and information
Costs
Marketing
Product
Price Promotion
Place
Customer Service
Levels
Logistics

Costs Costs
Order Processing
and information
Costs
TRADITIONAL SUPPLY CHAIN FLOWS
Demand flow
Manufacturer Distributor Retailer

Supplier
Product flow
ECR, Masters

Suppy Chain MGT Intro

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Introduction to Supply

Supplier Inbound Manufacturing Distribution Outbound Ultimate

My Supply Chain vs. Your Supply

Supplier Inbound Manufacturing Distribution Outbound Ultimate

…is the process of planning, implementing

[Council of Logistics Management, 1986]

…is the integration of key business processes

[The International Center for Competitive Excellence, 1994]

….is that part of the supply chain process that

[Council of Logistics Management, 1998]

CUSTOMER RELATIONSHIP MANAGEMENT

CUSTOMER SERVICE MANAGEMENT

MANUFACTURING FLOW MANAGEMENT

PRODUCT DEVELOPMENT AND COMMERCIALIZATION

! Manufacturing, distribution, and transportation

! Strategic alliances with channel partners and

Relationships with major suppliers are corporately managed in strategic

! Supplier categorisation and management is

! Purchase order transactions are integrated with

Focal Company Members of the Focal Company’s Supply Chain

2) What processes should be

Supply Chain Supply Chain

3) What level of integration and 1) Who are the key supply

Managed Process Links Focal Company

Alternative 1) Integrate with and actively

Alternative 2) Monitor the procedures of

Alternative 3) Not involved, leave the

CUSTOMER SERVICE MANAGEMENT

MANUFACTURING FLOW MANAGEMENT

PRODUCT DEVELOPMENT AND COMMERCIALIZATION

Physical & Technical Managerial & Behavioral

Planning and Management

Work Flow/ Power and

Organization Risk and

Communication Culture and

Demand Management Process Order Fulfillment Process

Product Development and Customer Relationship Management Process

Managed Demand Management Process Links

Managed Demand Management Process Links Focal Company.

Not-Managed Business Process Links.

R Product Business Product Movement Process Material

! Fully coordinated supply chain “cash to

! Integrated business processes for entire

! Measures shared across supply chain

Payments Payments Payments

Product Product Product

Variable cost Variable cost Variable cost Variable cost

Full manufac- Acquisition Other acquisition Other acquisition

Selling Other variable Selling Selling

❏ How should the existing supply chain be mapped?

❏ What is the value proposition at the consumer level or end

❏ What determines the processes to link with these key members?

❏ What determines the type/level of integration that should be

❏ The supply chain network structure

❏ Who are the key supply chain

…the process of planning, implementing and controlling

…is the integration of key business processes

[The International Center for Competitive Excellence, 1994]

Lot Quantity Warehousing

■ Local optimizations result from

Source: Harrison, Alan, “Co-Makership as an Extension of Quality Care,”International Journal

Partnering with our clients around